LONDON — The war in Ukraine, which has had more impact on the European economy than any news from Frankfurt or Brussels, appears to be ending, despite the sporadic attacks that have wrecked previous cease-fire attempts. Investors have mostly assumed that the cease-fire would not hold — either because President Vladimir V. Putin of Russia is deceitful and greedy for more territorial conquest, or because the Ukraine president, Petro O. Poroshenko, would not accept the splintering of his country that Russia demands. But this fashionable pessimism is probably wrong.
The cease-fire no longer relies on good faith or benevolence, but on a convergence of interests: Mr. Putin has now achieved all his key objectives and Mr. Poroshenko has recognized that trying to reverse the Russian gains by military means would be national suicide.
Admittedly, there is still a “party of war” in Kiev, seemingly led by Prime Minister Arseniy P. Yatsenyuk, who has called on NATO to back his country in an all-out war with Russia. But this week’s vote in the Ukrainian Parliament on temporary autonomy for the rebel regions suggests that most politicians have abandoned hope of winning a war with Russia and understood that Western military assistance is not coming.
This may sound like a grimly defeatist analysis, but a modest victory for Russia was actually the least-bad outcome, given that there was never any chance that economic sanctions would stop Mr. Putin. There are several good reasons to welcome the incipient Ukraine deal.
First, this compromise is infinitely better for Ukraine, as well as for Europe, than a protracted war. Although Mr. Poroshenko has been forced to make major concessions by offering partial autonomy to the Donbass rebels, this was always inevitable.
Second, Mr. Putin shows no sign of wanting to extend Russia’s boundaries after absorbing Crimea and destabilizing Donbass. Mr. Putin has proved that he will fight against any further encroachment onto Russia’s boundaries by the European Union and NATO, which he now views as an expansionist empire. But this does not mean that he hopes to restore Russian control over countries already absorbed by Europe and NATO, like Poland or Lithuania. Whatever Mr. Putin’s personal ambitions, he clearly understands that Russia is too weak economically to compete directly against European and NATO “imperialism.” His record suggests a status quo leader trying to preserve existing spheres of influence.
Third, the precedent of carving out parts of Ukraine is not necessarily catastrophic for the operation of international law in Europe. Russia’s annexation of Crimea was not, as is often claimed, the first attempt since 1945 to move European borders by military force. Borders have been forcibly changed in the breakup of Yugoslavia, the Turkish invasion of Northern Cyprus and the “frozen conflicts” in Moldova, Georgia and Azerbaijan.
Finally, what about the economic consequences for Russia and Ukraine? For Ukraine, which has the potential to challenge Poland as the dominant power in central Europe, and to overtake France as Europe’s leading agricultural producer, the key question is how much help the European Union will actually provide by way of financial support and technical assistance. Whether Europe is genuinely willing to devote the huge resources in money, time and manpower necessary to reform Ukraine is much more important for the country’s future than the precise terms of a Donbass autonomy deal.
For Russia, the long-term effects of the Ukraine crisis are equally ambiguous. Russia is certainly suffering from the economic sanctions. In the long run, however, it could reap economic benefits from the sanctions, while its politics become even more authoritarian. Russia’s economy is at present based on exporting energy to finance the importing of Western consumer and capital goods — a glaring example of the “natural resource curse” described by textbooks of development economics. But textbooks often fail to mention that the resource curse is a logical consequence of the classical free-trade idea that every country should specialize in whatever it makes most efficiently and import other goods.
A country that wants to become less dependent on exporting resources must, by definition, take steps to reduce its imports and support domestic production of the goods and services it wants to consume. While policies of self-reliance have sometimes proved disastrous, protection of domestic industries has been crucial for economic development in Japan, South Korea, China and Brazil, as well as the United States and Germany. Russia, in its development since 1992, has zealously applied the theory of comparative advantage.
If sanctions push Russia onto a path of greater self-reliance, its manufacturing and service industries will surely grow faster, even if their quality falls further behind Western standards. If Mr. Putin wants to strengthen domestic industries he will have to improve business and strengthen the rule of law. In short, the Ukraine confrontation and subsequent sanctions could help to transform Russia into a poorer economy that is less flashy but better balanced and ultimately stronger.
Anatole Kaletsky is a Reuters columnist and chief economist of Gavekal Dragonomics, an asset management company based in Hong Kong.'via Blog this'